Monday, September 14, 2009

Monday VIXology

The weekly update of the VIX/Qs charts shows some interesting developments.
A casual glance at the VIX chart might prompt a negative forecast for the Qs. The VIX is riding below the LR30 lower channel band, looking well oversold and a mean reversion outlook would bring the VIX back up to 26 as a first target.
Correspondingly, the Qs appear topping and/or moderately overbought based on the midpanel technicals and the RSI2 suggesting a short term retracement to a 40 level.
There is an alternate scenario however that must be given serious consideration.
The white vertical line at the July 15th marker defines what looks like a chart pattern very similar to what we're seeing today.
There are exceptions . . and these are significant.
I have mentioned a phenomenon known as "kissing the channel good-bye" when price breaks
either up or down away from the LR30 channel band and a new paradigm is formed.
The current VIX chart alignment strongly suggests the likelihood of such a kiss-off.
First of all, Moneysteam MS (a proprietary Worden Bros indicator), remains solidly downtrend in the VIX and uptrend in the Qs.
Second, the behavior of the Qs RSI2 following the July 15th apparent top reinforces our previously tested systems that argue for not trading RSI2 tops but rather RSI2 crosses down through overbought levels. . and we're not there yet.
Third, for several months we've been watching the VIX in a slow descent on the VIX Pivot Bands with an eventual target of 20, and then a leveling off. That 20 milestone has yet to be hit, but the recent behavior of the VIX over the past week continues to argue for that target.
On balance, the odds continue to favor the bulls.
Last week I was looking for the Qs to hit 41.25. We made that plus a quarter.
Going forward this week I'll profile in depth a NEM based pairs trade that I call Gold Digger. It's a very high probability pair with no losing trades and an equity curve that continues to rise today even though most of the other pairs that I've profiled recently have crossed through the R2 slope over a month ago.
Finally, thanks for all the pairs comments, feedback and e-mails . . they've kept my little pairs project on course and caused me to rethink some of my evaluation parameters and pair setups. The real brains behind this whole pairs modelling is, of course, Jeff Pietsch, over at Market Rewind and he has graciously and quickly reacted to any and all of my nagging suggestions and technical issues with the pairs algorithms.
Think of Jeff as the engineer and fireman for the pairs train.
I'm just a conductor riding in the caboose.

1 comment:

jgpietsch said...

Bob, you continue to flatter me! And flattery will get you... I hope you will experiment with the more aggressive trade option ("Switch on 1st Signal") and test the new trade report output tonight. It's still a bit crude there, but is should give you more to work with. Cheers, Jeff